ISLAMABAD: In line with commitments with the multilateral lenders to contain ever-rising pension bill, the government has started inter-ministerial consultations for major pension reforms including reduced benefits in commutation and regular payments for existing pensioners and the beginning of a contributory pension scheme for current employees.

A senior official at the Ministry of Finance told Dawn that all federal ministries and divisions had been asked to submit their comments on proposed “amendments in the pension scheme for existing pensioners and employees of the federal government”.

Most of the ministries have already submitted their views by the deadline this week and were being compiled for presentations to the all-powerful Special Investment Facilitation Council — a supra body of civil-military leadership led by the prime minister.

He said a few reform measures affecting the current influential officers had already been announced by former finance minister Ishaq Dar in his 2023-24 budget speech but could not be implemented owing to resistance from the beneficiary bureaucrats. The proposed reforms have been based on the recommendations of the Pay and Pension Commission 2020 to check the unsustainable rise in pension burden on the budget.

Ministries preparing final draft for presentation to SIFC

The pension bill stood at Rs609bn in FY23 but surged by a massive 32pc to Rs801bn in FY24. The pension bill for military pensioners increased from Rs447bn in FY23 to Rs563bn for FY24, up by 26pc while the civilian bill jumped from Rs163bn to Rs228bn this year, showing an increase of almost 40pc.

To contain the annual growth rate, the finance ministry has now proposed lower benefits for retirement. For example, the annual increase in pension is currently authorised as a percentage of gross or net pension i.e. compounding effect which means is based on the last drawn pension.

For the future, the increase will be given on gross or net at the time of retirement and the future increase will be indexed to the Consumer Price Index (80pc of CPI of last three years) with a maximum increase of 10pc per year.

Secondly, a government servant can currently request premature retirement with full benefits but in the future early retirement would be discouraged and a 3 to 10pc penalty would be imposed on the retiring employee.

Third, the pension is allowed currently based on the last drawn salary of the retiring employee. In future, it would be calculated on the average of the past 36 months, which obviously would be significantly lower.

Fourth, at present, the commutation/pension is allowed with 35:65pc ratio but this would be changed to a 25:75pc ratio. Fifth, restoration of full pension is allowed after completion of a number of years purchased but this would be discontinued in future.

Sixth, the pension at present is given as per the defined benefit model with the government taking the full burden on budget. This is being replaced with the establishment of a pension fund for which an initial seed amount of Rs5bn was allocated in the FY24 budget.

The three major reforms announced by the former finance minister in budget are also part of the fresh working paper. Under this, multiple pensions are authorised to individuals in case of the death of a spouse or children and father where applicable. In future, there will be an entitlement for only one pension. However, an option will be given to select the higher one and surrender all others.

Secondly, any individual when reemployed after retirement is currently allowed to get pay and pension, both from the federal government. This would come to an end. “If re-employed, both benefits will not be authorised from federal government i.e. either pay or pension will be authorised during re-employment. Individual has to forego either pay or pension”.

Third, at present pension is entitled to the third tier i.e. unmarried/widow/divorced daughter for life. The pensions will now be restricted to the third tier for only 10 years except for the Shuhada family for 20 years and disabled son or daughter for a lifetime.

Published in Dawn, January 25th, 2024